Governors Say ‘Everything Is on the Table’ in Face of Deficits

U.S. governors say everything from worker benefits to prisons to health-care spending may face reductions as they contend with a fourth year of budget deficits.

For five days last week, at the Republican Governors Association meeting in San Diego and the nonpartisan National Governors Association rookie orientation in Colorado Springs, state leaders discussed a post-campaign reality in which they must choose which pain to inflict on their constituents.

“Cutting is popular in the abstract,” said Governor-elect Dan Malloy of Connecticut, a 55-year-old Democrat, in an interview at the Colorado event. “Cutting services is unpopular. Everything is on the table.”

The longest recession since the 1930s caused the biggest decline in state tax receipts on record, according to the nonpartisan Center on Budget and Policy Priorities in Washington. States have filled more than $425 billion in funding gaps since fiscal 2009; the combined imbalance is likely to reach $140 billion in the next budget year, the center said. Meanwhile, 11 states had jobless rates of at least 10 percent in September, when the national average was 9.6 percent.

The governors met last week as borrowing costs surged, pushing yields on top-rated 10-year tax-exempt debt to their highest level since June.

‘Do Something’

Republicans and Democrats have been loath to suggest tax increases. New York’s Democratic Governor-elect Andrew Cuomo has said he won’t raise more revenue that way. Maryland’s budget will be balanced entirely with cuts, Democratic Governor Martin O’Malley said in Colorado.

“We have to make changes to shrink government,” John Kasich, the incoming Republican governor of Ohio, told a session of the Republican Governors Association conference last week in San Diego.

“You weren’t elected to get re-elected. You were elected to do something,” said Kasich, a former Ohio congressman.

What to do is increasingly difficult, say former governors and those about to take office. Colorado Democratic Governor- elect John Hickenlooper said in an interview at the NGA gathering that his transition team has already held 11 budget meetings.

Tight Squeeze

Governors have little room to maneuver around the largest spending items -- primary and secondary education, Medicaid and prisons, Jim Edgar, a former two-term Republican governor of Illinois, said in a telephone interview from Champaign.

“I think it’s going to be extremely difficult,” said Edgar, who served from 1991 until 1999. “You’ve got to cut more than waste. You’re going to have to cut good, worthwhile programs.”

“You look at your options, but none of them are going to be fun,” Edgar said. “It’s complicated and most people who have not been governor don’t appreciate it. I think a lot of them will wish they’d had a recount on the election.”

Complicating efforts to fill budget gaps is the end of President Barack Obama’s $814 billion economic stimulus and the potential expiration at year-end of the Build America Bond program, which has allowed states and municipalities to borrow $167 billion since 2009 with federal subsidies for interest costs.

Maryland will face a $1.2 billion gap in next year’s budget, said O’Malley.

Lean Years

“We’re going to be on a constant diet of deep and painful cuts,” he said. The trick, he said, will be preserving the state’s economic resiliency, he said.

“There are certain priorities that we must protect in order to continue to come out of this recession,” he said. O’Malley said he hoped to spare college affordability and tax credits for research-job creation from the deepest reductions.

Areas that may be cut, he said, are corrections, employee costs, pensions and Medicaid, the federal-state health-care program for the poor.

In Colorado, agencies must be consolidated, education re- examined and health-care costs lowered, said Hickenlooper, a former geologist who opened Colorado’s first brew pub.

“My predecessor has already gone through two years of severe cuts,” he said.

At the Republican Governors Association meeting, Governors- elect Scott Walker of Wisconsin and Rick Snyder of Michigan said they wanted reductions in employee benefits. Governor-elect Brian Sandoval of Nevada said tenure for public-school teachers should be eliminated and merit pay implemented.

Embracing a Tax

Arizona Governor Jan Brewer, a Republican, said she won re- election after supporting a sales-tax increase to 6.6 percent from 5.6 percent that she said was opposed by many supporters. The tax, intended to avert education budget cuts, was approved in May and expires after three years.

“This is coming from a person who has never voted for a tax increase in her life,” Brewer said in an interview in Colorado Springs.

Edgar predicted campaign rhetoric will give way to budget realities once the new governors take office.

“I think you’re going to have to see a combination of cuts and tax increases in a lot of states. And you’re going to have a see a multiyear solution,” Edgar said.

Governors are rethinking their states’ capabilities and responsibilities, said Ray Scheppach, executive director of the National Governors Association.

“We’re probably halfway through this adjustment but most of what has been done so far is survival,” he said. “It’s been a lot of terminations, furloughs, cuts and consolidation. The next stage is how do you change the delivery system so you are back on a longer-run, sustainable spending curve?”

For related news and information:

A detailed overview of state finances: MIFA Today’s top municipal finance stories: TOPM